Datalink (DTLK)

first quarter of 2009 compared to the first quarter of 2008 resulted primarily from a loss in Q1 2009 as opposed to income in Q1 2008 and from an increase in stock-based compensation expense as a result of a shortfall recognized in excess of the APIC pool for incentive stock options and vested restricted stock under SFAS 123(R).  In accordance, with APB No. 28 and FIN 18, the impact of the shortfall was recorded as a discrete item and recognized in the current period.  At March 31, 2009, excluding the impact of discrete items, our estimated annual effective tax rate for 2009 is 44.0% compared to our annual effective tax rate for 2008 of 39.7%.

As part of the process of preparing financial statements, we estimate federal and state income taxes. Management estimates the actual current tax exposure together with assessing temporary differences resulting from different treatment for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include within our balance sheet. Management must then assess the likelihood that we will utilize deferred tax assets to offset future taxable income during the periods in which these temporary differences are deductible.  For the three months ended March 31, 2009, we recorded income tax benefit of $221,000 with an effective tax rate of 27%.  In future periods of taxable earnings, we expect to report an income tax provision using an effective tax rate of approximately 44%.

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  At the adoption date of January 1, 2007 and at March 31, 2009 and 2008, we had no unrecognized tax benefits which would affect our effective tax rate if recognized.

We classify interest and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As of March 31, 2009 and 2008, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2005-2008 remain open to examination by both the Federal government and by other major income taxing jurisdictions to which we are subject.

5.                                       Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), we are required to assess the carrying amount of our goodwill for potential impairment annually or more frequently if events or a change in circumstances indicate that impairment may have occurred.

Testing for goodwill impairment is a two step process. The first step screens for potential impairment and if there is an indication of possible impairment we must complete the second step to measure the amount of impairment loss, if any.  The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of our market capitalization with the carrying value of our net assets. If our total market capitalization is at or below the carrying value of our net assets, we perform the second step of the goodwill impairment test to measure the amount of impairment loss we record, if any.  We consider goodwill impairment test estimates critical due to the amount of goodwill recorded on our balance sheet and the judgment required in determining fair value amounts.

Historically, our market capitalization has been well above the carrying value of our net assets and there has been no indication of potential impairment.  However, during the fourth quarter of 2008 and the first quarter of 2009, the price of our common stock was significantly impacted by the volatility in the U.S. equity markets.  The price of our common stock reached a low of $2.50 during the first quarter of 2009, remained below $3.00 per share for an extended period of time during the first quarter of 2009 and closed at $2.89 on March 31, 2009.  These lows in the price of our common stock have coincided with the stock markets’ 52 week lows recorded as the financial crisis has intensified.  As of March 31, 2009, our market capitalization was approximately $37.3 million as compared to our stockholders’ equity at March 31, 2009 of $42.1 million.

We believe that the fair value of our company exceeds our market capitalization because our fair value should include a control premium.  A control premium is the amount that a buyer is willing to pay over the current market price of a company as indicated by the traded price per share (i.e. market capitalization), in order to acquire a controlling interest. The premium is justified by the expected synergies, such as the expected increase in cash flow resulting from cost savings and revenue enhancements.  We believe a control premium of 20 to 40 percent is appropriate for our company.  Applying a control premium of 20 to 40 percent results in a revised market capitalization at March 31, 2009 of between $44.8 million and $52.2 million, which is in excess of our stockholders’ equity at that date of $42.1 million and indicates there was not then an impairment of our goodwill.  However, we can provide no assurance that these continuing conditions will not trigger goodwill impairment testing in the future or whether we may record an impairment charge.  We will continue to monitor and evaluate the carrying value of our goodwill to determine whether interim asset impairment testing is warranted.

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6.                                      Valuation of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), we are required to perform an impairment test for finite-lived assets and other long-lived assets, such as fixed assets, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  As March 31, 2009 and 2008, respectively, we determined that no triggering events had occurred during the quarter and our long-lived assets were not impaired.

7.                                      Recently Issued Accounting Standards

Effective January 1, 2009, we adopted SFAS 157 for nonfinancial assets and nonfinancial liabilities.  Nonfinancial assets and nonfinancial liabilities include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  The adoption of SFAS No. 157 for nonfinancial assets and liabilities had no impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”) which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and for disclosure to enable evaluation of the nature and financial effects of the business combination. The adoption of SFAS 141(R), effective January 1, 2009, did not have any impact on our financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 introduces significant changes in the accounting and reporting for business acquisitions and noncontrolling interest in a subsidiary. SFAS 160 also changes the accounting and reporting for the deconsolidation of a subsidiary. Companies are required to adopt the new standard for fiscal years beginning after January 1, 2009. We adopted this standard as of January 1, 2009 and it did not have any impact on our financial statements.

In April 2008, the FASB issued Staff Position FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  The FSP amends the factors considered in developing renewal or extension assumptions for determining the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.”  The FSP’s intent is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under other accounting principles generally accepted in the U.S.  Companies must adopt the FSP for fiscal years and interim periods beginning after December 15, 2008.  Early adoption is prohibited.  Companies must apply the guidance for determining the useful life of a recognized intangible asset prospectively to intangible assets acquired after the effective date.  Companies must also apply certain disclosure requirements prospectively to all intangible assets recognized as of, and subsequent to, the effective date.  The adoption of FAS 142-3, effective January 1, 2009, did not have any impact on our financial statements.